Topic: Question from a Bachelor in Econ (Read 2737 times)

Exactly right, the reason $ or £ or yen or euro dont move much is because they have multi trillion dollar market depth, making them move significantly requires massive amounts of trades, like they are ocean going tankers which take miles to turn around, bitcoin is a tugboat in comparison.

Although my primary is not in Economics, I have some views on this.

Currently, It is followed by supply and demand, also people's trust. There are many ways to manipulate the fiat-price per BTC easier than current markets known such as suspend BTC withdrawal, Dollars withdrawal, Barred by Governments and so on.

Let me ask you one thing, Do you think the GOOGLE's (NASDAQ: GOOG) stock price worth A grand apiece?

No apologies necessary. Sometimes things get lost in translation on forums.

So, I apologize for the detour, let's get the thread back on track...

Alright. Apologies in order.

I simply mistook when you said "non-trivial" to be implying that the forex markets were responsible for the vast majority of the volatility when in fact you were implying the opposite. This was the linchpin of my misunderstanding.

Now I understand you were arguing for something that I would consider trivial, relative to the conversation as it had existed before you came in. Thus, I totally misunderstood.

Sorry if I offended you. I assumed you were an Austrian ideologue and treated you as such (not a huge assumption considering we are in the Economics portion of the Bitcoin forums ).

So again. Sorry if I offended you. I does seem that you were honestly trying to contribute to the discussion with mainstream economic theory. I appreciate that.

I didn't bring up letters next to my name. You did. Look at the title of this thread. Then, when you're done, look at how you unwisely questioned my education in a patronizing fashion.


Why? It's basic trade theory. Literally, econ 101.


I'm not saying all currencies are moving up and down in value together. If that was the case, exchange rates from a domestic currency to foreign currency would never fluctuate. Of course, they move in varied directions. My general point was changes to the supply of the domestic currency impacts exchange rates with other currencies (including Bitcoin).

I was careful with how I chose my words. I said that a "non-trivial amount of volatility" with Bitcoin could be due to changes with the domestic currency (such as QE). Which is objectively true because it's an exchange rate.

No, once again (I already said this and you didn't respond to it), Bitcoin and commodities such as gold could be thought of as substitutes, not complements. Therefore, gold prices (in USD) could go up, while Bitcoin (in USD) prices go down. And... that... is with holding all other factors (not in question) constant.


Says who? Re-read the part on substitutes.


Just to clarify, again, I never said that Bitcoin in and of itself (it's demand, for example) is not volatile. Of course it is. I believe demand for Bitcoin is volatile because it's a burgeoning currency and there's risk involved. The supply is fixed. Yet, my point was that many forget the Bitcoin side of the equation (Bitcoin demand and supply) is not the ONLY reason for it's volatility. To provide an example, let's use Bitcoin priced in USD. If the Fed decides to stop QE in totality, this would have an effect on the price of Bitcoin... yet, holding all else constant, the mechanism would actually be through the Supply of USD, not Bitcoin itself. This is often forgotten, which is why I originally raised the point.


My points are all 100% accurate. And they were presented as straight-forward as possible. Supply and demand for money in country A can effect the exchange rate with country B (or in this case Bitcoin). That's fact. Seriously, go ahead and look it up...

I don't care what letters are next to your name, but if you have as much education in economics as you suggest, then your argument is extremely odd to me.

The fact is that if all the currencies are moving up and down in value together as you suggest, thus causing the volatility in BitCoin, then commodities should move up and down in value relative to these currencies together. They may move in different proportions, but they should move generally in the same direction at the same time. Furthermore, it seems odd that if it is the currencies that are so volatile and not BitCoin that prices in countries like the US are relatively stable compared to the price of BitCoin relative to strong currencies.

It seems strange to me that someone with a degree in mainstream economics would suggest otherwise, so you will forgive me if I doubt your credentials. If there is something I am truly not getting in your argument that links it to mainstream economic theory, please enlighten me.

I would advise you to be careful when judging someone's credentials. I would bet heavy money that my background and education in economics is much more in depth than your own.

Now on to your point,... no what I said does not imply that gold and Bitcoin would move more-or-less in lockstep with the dollar. What I said is that anything affecting the supply of dollars, would affect the exchange rate with Bitcoin. That is a fact. I do believe that anything affecting the supply of dollars would also affect the exchange rate with gold. However, one could say that Bitcoin and gold could be considered substitutes (certainly in high-risk times, where Bitcoin's value is questioned). Therefore, arguing that they would move in lock-step from what I stated is definitively flawed economic thinking. I suggest you return to the Khan Academy videos....

If argument this were correct, then gold and BitCoin would move more-or-less in lockstep relative to the dollar. But they don't. Because this is flawed economic thinking. Because you need to learn some basic econ, much of which can be learned for free on Khan Academy.

In regards to Bitcoin (or cryptocurrencies in general), some forget that an exchange rate is a function of two entities, not one. Point being, clearly Bitcoin's exchange rate is volatile, but how much is due to Bitcoin and how much is due to the currency manipulation on the other end?

I would think a non-trivial amount of the Bitcoin exchange rate volatility is not in relation to the burgeoning currency itself, and may actually be more dollar-related (or domestic currency-related). Remember, Bitcoin's supply is fixed. The dollar's is not. Any news on what the Fed will do in regards to QE or interest rates affect a fixed-supply currency's exchange rate with the USD dramatically. Whereas, the USD exchange rate with foreign currencies may not fluctuate as much because those foreign currencies may also be manipulating their supply in response to the Fed's communications and, further, their economies are already largely linked to the USD.

Just something to keep in mind.

Why can't it just be a gold bubble? I really think there is a better argument for a gold bubble.



No, money is supposed to be what it is: a liquid medium of exchange. That is its primary purpose.



"The widely repeated idea that [the CPI is] updated by an index that does not include food and energy is simply not true" (http://www.bls.gov/opub/mlr/2008/08/art1full.pdf page 11).



You are not the first person to mention this site to me. There is gobs of info on the internet saying that the site is full of crap.

http://blog.jparsons.net/2011/03/shadow-stats-debunked-part-i.html

http://rationalwiki.org/wiki/Shadow_Government_Statistics

Google "shadow stats" and you'll find a lot more.



Even Hayek thought deflation was bad. Deflation is bad (http://en.wikipedia.org/wiki/Deflation#Effects).



If you read the highly influential book that predicted both the .com crash and the housing bubble burst, Irrational Exuberance (http://en.wikipedia.org/wiki/Irrational_exuberance), you will see that the bubble was born far before 9/11. The data is clear as day on this point.



I met quite a few people with stories like yours when I lived in middle-of-nowhere Thailand for two years. One of them told everyone of the several BMW's that he had had. And then lost. People who have a poor grasp of mainstream economic theory who shirk diversification and put all their money into a few things may win once in a while but eventually they will lose big. You got good luck; someday you will have bad luck. It is evidence of nothing.



This argument requires fundamental misunderstanding of how our money and banking system works.

Instead of me regurgitating a couple hours worth of macro lectures, I highly recommend to brush up on basic Economic theory, especially Macroeconomic theory. I further recommend it for anyone else who is confused why the poster was wrong on any of these points. Khan Academy is awesome for stuff like that.

https://www.khanacademy.org/economics-finance-domain/macroeconomics

There are people that sometimes say that they know mainstream macro well enough already, but what often happens is that when I quiz them about basic macro, they really don't know it. It is VERY important to know the mainstream viewpoint if yours is not the mainstream one because you must be secure that you are not arguing against a straw man (http://en.wikipedia.org/wiki/Straw_man) and that you are following the Principle of Charity (http://en.wikipedia.org/wiki/Principle_of_charity).



Unlikely if the mechanism works like a normal pegging: you affect things slowly. It doesn't snap back like a rubber band.



This is untrue. Small currencies (as far as I know) almost always peg their value to avoid price instability.



There is no good data to support this point that I am aware of.



Awesome. I'll research this. Update: Ripple currency does not peg it's value and it is not P2P.



Exactly!



Interesting point. I would argue that such a concept would be more centralized than BitCoin but less centralized that Ripple (though I haven't researched Ripple enough yet...).

Depends on the metric. Short term volatility has not changed; in fact, I'd probably argue that it has gone up.



What you're looking for is distributions. I'd argue that markets have gotten more Levy-distributed over time (smaller day to day flunctuations, larger extreme flunctuations). This at least partially contributes to the volatility smile, a phenomenon that has started to occur since 1987. Volatility microstructure (at the second-millisecond level) has also changed dramatically particularily in the last few years from HFTs, but that is a topic for another discussion.

It is impossible.
Coins that do this are centralized and their "P2P"ness is just an implementation detail.

Any interaction with the real world, or real world information is centralization. You might then as well keep balances in a text document with notepad. Securing virtual tokens with cryptography is a waste of time when their actual value depends on a central entity.

Sure it is. A volatile price means greater risk on the part of the user. So he thinks maybe this is not such a good thing to use. Maybe I should use something that does not carry that risk.

The exchange value of bitcoin is not pertinent to its utility as a means of executing and recording transactions.  The value of bitcoin is not relevant to a user who merely wants to send money.  It is relevant to people who wish to invest in the technology or speculate on its price-changes. 

That's completely false. Yes, there's a century's worth of past stock market trading data to suggest that a larger volume makes for a more stable market.

It's difficult to understand what you mean by "initial centralized online exchange that the P2P program runs".  My best guess is that you'd like to consider an entity X that the P2P protocol recognises as special for a limited time.  X would have the job of controlling the rate of issuance of the currency.  Of course, at any time when the cryptocurrency is losing value against your reference currency, X would be helpless to maintain the peg (it could not reduce the supply), but we'll ignore this weakness, settling for the idea that some control is better than no control.

What you have in effect is what's known as a 100% pre-mine.  We begin an alt-coin where X has all of the coins and the network is sustained by transaction fees alone.  X then gradually injects these coins into the economy, adjusting the rate in an attempt to limit the value of a unit of the alt-coin in terms of a reference currency.

The closest example to this I'm aware of is Ripple.  X in this case is a company called Ripple Labs (formerly OpenCoin).

My MacroEcon 303 prof was a Keynesian, and I would disagree with him all the time about the economy, what direction it was going in, and why.  How government, nd fed's the fiscal and monetary policy would effect the economy, right or wrong, nice, but with a price to pay later down the line.  At least one a week I would end up getting out of me seat grabbing chalk and writing on the backboard arguing my point of view.  For example, in 2007, I thought that Greenspans 1% interest rates were left too low too long which enabled the funding of the housing and derivative/credit bubble once congress opened the door when they let banks play hedge fund with their depositors savings at 40:1, and that housing bill.

I thought that bernanke's raising interest rates would continue pushing housing prices down by that magic 2%, that would push Bear Stearns, or Lehman, or JP, or Goldman( prob not tho cause they basically are the NY fed) at their 40:1 leverage into margin call causing a cascade effect across the banks and whole economy, a crash... as the leverage upon leverage, all these malinvestments, that couldn't have been made unless the monetary and banking system had been distorted in the first place by the fed playing with interest rates.

He was a Keynesian, you actually reminded me of him.  He disagreed citing all the reasons you've cited for a central bank being a good thing.

I paid for college off those trades.  Now I'm investing my future into bitcoin with similar conviction, and surety that I'm not gambling, but investing in a macroeconomic near inevitability.
The same Austrian principals and knowledge of K, neo-K, and  informed by all the other heterodox economic theories I've studied ...are what are informing my reasoning behind my opinion, and willingness to put 20k, my lifes savings into starting a bitcoin business, because of how sure I am that there's going to be a growing, evolving, massive, and world changing bitcoin economy out there, and I wanto 1 be a part of it, and 2 get in on the ground floor.  This is definitely the ground floor.  <$100 was the basement.  We've got a long way to grow.

There's your problem.

The users of SophyphreakCoin have to trust that the intervention in the issuance rate won't be manipulated by the markets. The miners would be in prime position to do so, seeing as they would be privileged to receive all additions to the money supply. This can happen now, but the rate of issuance cannot be affected by price manipulation (or at all).

I think you're having difficulty reconciling a different model with the one you know well. Yes, the Satoshi model has price instability, but so do other small currencies. And to make matters worse, this is a grass roots project, implemented with highly novel software design. The sheer scale of differences in this system when compared to the incumbent system causes alot of the uncertainty.

The solution, then, is for people to learn about and adopt this model, and for the necessary time to pass as required by the former. Don't forget that there is a real possibility that the incumbent fiat currency system will not be in a stable condition by the time bitcoin volatility is tamed.

if you look up the volatility of all the currency pairs on the forex market, you will see that those with the highest trading volume sure the least volatile  the market in bitcoin is just too thin at the moment, and as time goes on and it becomes more widely used, trading volume will go up and stability will increase.  you mentioned the flash crash.  that was the result of all the high frequency traders, the speculators, the market makers pulled out, and there wasn't the usual liquidity, and as the sell orders came, the bids just dropped off the whole order book.   i was doing manual HFT for a small hedge fund at the time, that's what happened.

You have it backwards.  Gold is much more stable than the dollar. everything is just a ratio its XAU/USD when that goes up, it could very well be the dollar going down.  Which you can tell that it is because if you chart gold against other commodities and assets, you will find that the assets are correlated with gold, not the dollar, so it is the dollar that's really doing the moving. We have seen a 94% devaluation in the US dollar.  Money is supposed to be a store of value, not  a secrete government tax machine.  How do you think the government funds wars bail outs etc.  it prints money, which is taking away value of your money, so everything costs more.  the CPI leaves out fuel and food so much of the inflation is missing.  also check out shadowstats.org the calculate the CPI and unemployment the way the did up until clinton.  Bush changed it which essentially cooked the books.

A little bit of deflation can be a good thing, in an economy that doesn't wildly print money,and fuel a highly leveraged fractional reserve banking system.   People don't need to be forced into spending money, whenever the government is trying to stimulate consumer spending, it's in a time when the consumers need to ne saving, and recovering, people buy things and invest all the time.  Also as for bitcoin, if the whole world used bitcoin, and everyone just stopped spending it the global economy, it's wealth would stop growing, incentivizing people to do all the things that the fed pretends to need to control.

There's more to economics than what's written in a textbook by Mankiw, your professors don't know everything.  Though in the end you are a Keynesian through and through you are going to have problems with a currency developed expressly with and on  Austrian Economic ideals and principals.  When it works the Keynesians will see you don't need a central authority manipulating, and distorting the economy, which always leads to disaster. Central bankers are part of the government, and thus they will always have political pressures and motivations, leading to, say holding interest rates down at 1% after 9/11 way too long and creating a huge bubble.   

nd the reason we aren't seeing crazy massive sick nasty inflation from the money the banks are printing is because it's being hoarded by the banks, then lent back to the government  through treasury buys so the banks can heal and make money on the intereest rate spread from the fed to treasuries.  Which is just taking that value away from every other holder of the us dollar.  If that money comes out there's gina be big trouble.  Though the fed thinks they can thread the needle and stop injecting the economy with monetary cocaine, just when its cracked out enough to move it's broken ass on its own, right before its (our economy's) hear explodes.